Foundations of Economics Test Questions
Course Introduction
Foundations of Economics introduces students to the basic principles, concepts, and tools that underpin economic analysis. The course covers the fundamentals of microeconomics and macroeconomics, including supply and demand, market structures, consumer behavior, production and costs, and the role of government in the economy. Students will explore how individuals, firms, and societies make choices in the face of scarcity, and examine contemporary economic issues within local, national, and global contexts. The course aims to develop critical thinking and analytical skills, providing a strong basis for further study in economics and related disciplines.
Recommended Textbook
Economics for Today 5th Edition by Allan Layton
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2164 Verified Questions
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Chapter 1: Thinking Like an Economist
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Sample Questions
Q1) Inflation is a concern of:
A) macroeconomics.
B) microeconomics.
C) both political science and philosophy.
D) neither macroeconomics or microeconomics.
Answer: A
Q2) Policies to determine the price of troll dolls are a concern of macroeconomics.
A)True
B)False
Answer: False
Q3) The statement: 'When buyers and sellers interact in the market, the equilibrium price is $50 per unit', is an example of normative economic analysis.
A)True
B)False
Answer: False
Q4) Economists most often disagree over positive rather than normative economic issues.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Applying Graphs to Economics
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Sample Questions
Q1) Which of the following pairs is the most likely to exhibit an inverse relationship?
A) The amount of time you spend studying and your final marks.
B) Waiter's tips and his/her service.
C) The annual income and demand for overseas travel.
D) People's annual income and their expenditure on second-hand clothes.
Answer: D
Q2) In Exhibit A1.4, the slope for straight line CD is:
A)5.
B)1.
C) -1.
D) -5.
Answer: C
Q3) In a graphic relationship, shifts in a curve are caused by a change in:
A) the slope of the curve.
B) a factor not measured on the axes of the graph.
C) one of the factors measured on either axes of the graph.
D) any factor, whether measured on the axes of the graph or not.
Answer: B
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Chapter 3: Production Possibilities and Opportunity Cost
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Sample Questions
Q1) In order for an economy to shift its production possibilities curve rightward, it must:
A) increase the rate of unemployment.
B) attract more workers to the country.
C) use its resources more efficiently.
D) spend less on research and development.
Answer: B
Q2) Bill has $10 that he can spend on a Superman action figure, a Batman graphic novel or an X-Men T-shirt. Bill decides to buy the action figure, even though the graphic novel was a close second choice. What is the opportunity cost of buying the action figure?
A) The amount he spends: $10.
B) Nothing, since he got his preferred choice.
C) The Batman graphic novel.
D) The X-Men T-shirt.
Answer: C
Q3) An increase in current consumption is necessary for economic growth.
A)True
B)False
Answer: False
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5
Chapter 4: Market Demand and Supply
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Sample Questions
Q1) In Exhibit 3.3, a shift in the supply curve from S<sub>1</sub> to S<sub>2</sub> represents a/an:
A) decrease in supply.
B) decrease in the quantity supplied.
C) increase in supply.
D) increase in the quantity supplied.
E) increase in demand.
Q2) In Exhibit 3.3, a shift in the supply curve from S<sub>1</sub> to S<sub>2</sub> is possible because of:
A) subsidies to consumers.
B) higher taxes imposed on producers.
C) changes in consumer preferences.
D) technological innovation.
Q3) Which of the following pairs is the best example of substitutes?
A) Coffee and cream.
B) Videotapes and VCRs.
C) Honey and biscuits.
D) Hiking boots and athletic shoes.
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6
Chapter 5: Markets in Action
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Sample Questions
Q1) The government would use production taxes to remedy the problem of substantial:
A) internal benefits of production.
B) external benefits of production.
C) external costs of production.
D) external benefits of consumption
Q2) If the market supply decreases and, simultaneously, market demand increases, the new equilibrium will show:
A) market price will increase, decrease or remain the same and quantity exchanged will Decrease.
B) market price will increase and market quantity exchanged will decrease.
C) market price will decrease and the quantity exchanged could increase, decrease or remain the same.
D) market price will increase and market quantity exchanged could increase, decrease or remain unchanged.
Q3) Price floors are instituted because the government wants to:
A) help consumers to switch to the new product.
B) help people on low income.
C) raise tax revenue.
D) increase supply.
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Page 7
Chapter 6: Elasticity of Demand and Supply
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Sample Questions
Q1) The income elasticity of demand for cars is estimated to be 5.5 in the short run. We can conclude that:
A) when the price of cars reduces by 10 per cent, cars sales increase by 55 per cent.
B) when the price of cars rises by 10 per cent, cars sales increase by 55 per cent.
C) when income rises by 10 per cent, cars sales increase by 55 per cent.
D) when income rises by 10 per cent, cars sales increase by 5.5 per cent.
Q2) The president of Tucker Motors says, 'Lowering the price won't sell a single additional Tucker car'. The president believes that the price elasticity of demand is:
A) perfectly elastic.
B) perfectly inelastic.
C) unitary elastic.
D) elastic.
Inelastic.
Q3) The tax incidence indicates that tax is always paid by sellers.
A)True
B)False
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Chapter 7: Production Costs
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Sample Questions
Q1) Which of the following is true at the point where diminishing returns set in?
A) Both marginal product and marginal cost are at a maximum.
B) Both marginal product and marginal cost are at a minimum.
C) Marginal product is at a maximum and marginal cost at a minimum.
D) Marginal product is at a minimum and marginal cost at a maximum.
Q2) In Exhibit 6.9, the U-shaped LRAC curve indicates which of the following as quantity increases from 0 to 4000?
A) Diseconomies of scale; constant returns to scale; economies of scale.
B) Constant returns to scale; economies of scale; diseconomies of scale.
C) Economies of scale; constant returns to scale; diseconomies of scale.
D) Diseconomies of scale; economies of scale; constant returns to scale.
Q3) The vertical distance between the TC and TVC is:
A) AVC.
B) MC.
C) TFC.
D) ATC.
E) TMC.
Q4) A zero economic profit is the same as a zero accounting profit.
A)True
B)False
Page 9
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Chapter 8: Perfect Competition
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Sample Questions
Q1) Assume the short-run average total cost for a perfectly competitive industry decreases as the output of the industry expands. In the long run, the industry supply curve will:
A) have a positive slope.
B) have a negative slope.
C) be perfectly horizontal.
D) be perfectly vertical.
Q2) A perfectly competitive firm has control over:
A) the number of firms in the market.
B) market conditions.
C) the price at which to sell.
D) the quantity of output to produce.
Q3) One of the characteristics of perfect competition is that:
A) some firms can influence price.
B) firms depend on each other in setting the output.
C) firms produce a differentiated product.
D) consumers do not distinguish between the sellers.
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Chapter 9: Monopoly
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Sample Questions
Q1) In contrast to a perfectly competitive firm, a monopolist earns:
A) negative economic profit in the long run.
B) zero economic profit in the long run.
C) positive economic profit in the long run.
D) positive economic profit in the short run.
Q2) The only dentist in a small isolated country town is an example of a/an:
A) oligopoly.
B) monopolistically competitive firm.
C) monopoly.
D) competitive firm.
Q3) Economies of scale means that competition is unsustainable because:
A) competition results in lower quantity and lower price.
B) as firms become larger, the inefficiency grows.
C) one large scale firm can produce at lower cost than several firms.
D) it is easier to control one firm than many firms.
Q4) To maximise its profit, a monopoly should choose a price where demand is:
A) unitary elastic.
B) inelastic.
C) elastic.
D) vertical.
Page 11
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Chapter 10: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) A pay-off matrix used in game theory shows:
A) the concentration ratio in an industry.
B) the profit firms can earn in a cartel.
C) how much firms can earn or lose under different strategies in an imperfect competitive market.
D) the proportion of firms that sell a differentiated product to their customers.
Q2) A monopolistically competitive market is characterised by:
A) many firms and consumers with differentiated products.
B) a single seller of a product that has few suitable substitutes.
C) very strong barriers to entry.
D) mutual interdependence in pricing decisions.
Q3) Game theory explains:
A) gambling problems.
B) how the decisions are made in a game of soccer.
C) strategic responses of firms.
D) the effect of games on the economy.
Q4) Firms in monopolistic competition are price takers.
A)True
B)False
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Chapter 11: Policy Issues: Housing Affordability and Climate Change
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Sample Questions
Q1) Which of the following statements is true?
A) A 'cap and trade' scheme is beneficial to consumers because more goods are produced.
B) A new emissions reducing production technology will increase the price of emissions permits.
C) A 'cap and trade' scheme has a fixed price for emissions permits.
D) A decrease in demand for permits reduces the equilibrium price of permits.
Q2) In Exhibit 10.2, what is the price of carbon intensive outputs if the supply is 'Supply 1'?
A) $30.
B) $40.
C) $50.
D) $20.
Q3) Economists prefer:
A) the emissions trading over regulation.
B) the emissions trading with regulation.
C) regulation over the emissions trading.
D) regulation over the carbon tax.
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Page 13
Chapter 12: Measuring the Size of the Economy
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Sample Questions
Q1) Intermediate goods are goods and services used:
A) by the ultimate user.
B) by state and local governments.
C) as inputs.
D) both as inputs and final goods.
Q2) Which of the following would not be included in the government consumption expenditures and gross investment (G) category of GDP?
A) The payments made to social security recipients.
B) Expenditures made to repair a highway.
C) Spending for professors at universities.
D) The purchase of new china for parliamentary functions.
Q3) Gross national expenditure (GNE) is equal to:
A) C + I + G + NX.
B) C + I + G - NX.
C) C + I +G.
D) C + I + G + M.
Q4) In an open economy, domestic savings must always equal investment.
A)True
B)False
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Chapter 13: Business Cycles and Economic Growth
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Q1) A trough is the turning point in national output between recession and peak.
A)True
B)False
Q2) Reducing business cycle fluctuations is an important goal of macroeconomic policy because it:
A) allows inflation to be zero.
B) keeps output constant.
C) keeps unemployment at zero.
D) helps keep inflation low.
Q3) If an increase in labour and capital of 10 per cent leads to output increasing by 20 per cent then, ceteris paribus, the economy is operating with:
A) diseconomies of scale.
B) decreasing returns to scale.
C) constant returns to scale.
D) increasing returns to scale.
Q4) Government intervention may be necessary for an economy to increase its living standards in the long run.
A)True
B)False
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Chapter 14: Inflation and Unemployment
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Sample Questions
Q1) The unemployment rate might be understating unemployment because of:
A) a variable interest rate.
B) overexploited workers.
C) underemployed workers.
D) disinterested workers.
Q2) Suppose buyers expect prices to rise dramatically in the near future. If they decide to purchase items today before the price rise, the possible result can be:
A) cost-push inflation.
B) demand-pull inflation.
C) deflation.
D) diminishing returns.
Q3) Demand-pull inflation:
A) is a shortage in demand.
B) is a lack of demand for local goods.
C) is an excess in nominal demand across many markets.
D) is an oversupply of imported goods.
Q4) To be counted as unemployed, a person must be retired.
A)True
B)False
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Chapter 15: A Simple Model of the Macro Economy
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Sample Questions
Q1) Which of the following is not a reason for the downward slope of an aggregate demand curve?
A) Real balance effect.
B) Real interest-rate effect.
C) Net exports effect.
D) Effect of changes in the composition of inputs for aggregate production function.
Q2) The consumption function explains:
A) the relationship between consumption and dissaving.
B) how much households want to spend on goods and services at different levels of disposable income.
C) purposes of consumption.
D) none of these.
Q3) According to the interest-rate effect, as the price level:
A) rises, people feel poorer and buy less.
B) rises, Australian products become more expensive and foreigners buy fewer Australian goods.
C) rises, interest rates fall and people buy less.
D) rises, interest rates rise and people buy less.
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Chapter 16: The Monetary and Financial System
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Sample Questions
Q1) Which of the following relationships with respect to banks is correct?
A) assets = liabilities - shareholders' equity.
B) shareholders' equity = assets - liabilities.
C) shareholders' equity = minimum liquidity requirements + exchange settlement account balance.
D) liabilities = assets + shareholders' equity.
Q2) When interest rates rise, the quantity demanded of money held for the:
A) speculative demand rises.
B) precautionary demand rises.
C) transactions demand falls.
D) speculative demand falls.
Q3) The financial futures market is used to:
A) hedge against future interest rate movements.
B) hedge against current interest rate movements.
C) influence the money supply.
D) allow banks to transact with each other.
Q4) When there is an excess demand for money, individuals, business and agencies will attempt to purchase bonds.
A)True
B)False
Page 18
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Chapter 17: Macroeconomic Policy I: Monetary Policy
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Sample Questions
Q1) If the money supply = $100 billion, nominal GDP = $400 billion, then the velocity of money is:
A) 0.67.
B) 1.5.
C)2.
D) 4.
Q2) According to monetarists:
A) money supply directly determines changes in prices, real GDP and employment.
B) monetary policy acts too slowly to cause any changes in aggregate demand.
C) monetary policy acts indirectly causing changes in interest rates but not in investment and aggregate demand.
D) monetary policy acts indirectly causing changes in interest rates first before affecting investment and aggregate demand.
Q3) Which of the following is a reason for the Keynesian view that monetary policy plays a minor role in affecting the economy?
A) The money demand curve is vertical.
B) The investment curve is very steep.
C) The money demand curve is horizontal at any interest rate.
D) The monetary rule.
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Page 19
Chapter 18: Macroeconomic Policy II: Fiscal Policy
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Sample Questions
Q1) The deliberate use of changes in government spending and/or taxes to alter AD and stabilise the business cycle is called:
A) monetary policy.
B) important international policy.
C) continuous fiscal policy.
D) discretionary fiscal policy.
Q2) When the economy enters a prosperity phase, personal income tax collections:
A) fall and so disposable income and spending fall more slowly than real GDP.
B) fall and so disposable income and spending do not rise as rapidly as real GDP.
C) rise, and so disposable income and spending do not rise as rapidly as real GDP.
D) rise, and so disposable income and spending fall more slowly than real GDP.
Q3) According to supply-side economists, substantial tax cuts will result in:
A) a decrease in the supply of labour.
B) a decrease in the after-tax wage.
C) a decrease in the AS curve.
D) an increase in productive investment.
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Chapter 19: International Trade and Finance
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Sample Questions
Q1) Which of the following are problems with the employment argument for tariff protection?
A) It only protects foreign jobs, not domestic jobs.
B) It raises costs to firms, who in turn have higher output and hence higher employment.
C) Developed countries can't hope to compete with low-wage nations.
D) It reduces demand by consumers, thereby leading to higher unemployment in particular industries.
Q2) The current account balance on goods and services is:
A) C + I +G
B) C + I + G + M.
C) C + I + G + (X - M).
D) (X - M).
Q3) International trade allows a country to consume a combination of goods that lies only inside its production possibility frontier.
A)True
B)False
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